Identification

• Under Internal Revenue Service regulations, the majority of all personal and investment property is considered a capital asset. If and when any such property is sold, capital gains or loss is realized. Capital gains from personal and investment property are considered income but are generally subject to a different tax rate than ordinary income. Real property established as part of a business is not considered a capital asset for tax purposes.
  
  

Basis of the Property

• Whether or not the price from a sale of real estate reflects capital gains depends on the basis of the asset. For tax purposes, federal laws in the United States define the basis as the amount of investment in a property --. in other words, the original purchase price plus associated expenses, such as closing costs, appraisal fees, and other charges incurred at the time of purchase. In addition, rental property used as an investment may need periodic repairs. These expenses are considered part of the adjusted basis in the real estate and, thus, can be reported to reduce any capital gains. Furthermore, property taxes, as well as the cost of any improvements made to the property, can be figured into the adjusted basis to the taxpayer's benefit.
  
  

Sale of a Main Home

• A taxpayers who sells his main home generally does not have to claim the full proceeds as capital gains. However, any portion that may be taxable is considered capital gains income. In 2010, gains up to $250,000 for a single taxpayer or $500,000 for taxpayers married filing joint returns could be excluded from income if the taxpayer lived in the home for two or more years during the prior five years before selling and had not used the main home exclusion on federal taxes during the two years preceding the sale of the home.
  
  

Short-term and Long-term Capital Gains

• Property owned for one year or less, when sold, produces short-term capital gains or loss. Earnings on property held for more than one year and subsequently sold are considered long-term capital gains. Real estate received via inheritance must be classified as long-term, irrespective of the amount of time the taxpayer holds the property.